Amazon's next big challenge: Winning India
Growth in Amazon Web Services, the company's profitable cloud computing business, soaked up much of the spotlight on the company's subsequent earnings call, but there was one other topic that investors and analysts kept bringing up: India.
Amazon only officially launched in the country in June 2013, but it's now the company's fastest growing geography in terms of sales.
Amazon also says that it's the biggest online store in India with more than 25 million products for sale.
That's about 5 million more than the most recent numbers from one of its biggest local competitors, Flipkart.
Interestingly, Flipkart's founders actually both worked at Amazon before leaving in 2007 to build their own company. Exactly one day after Flipkart raised a mammoth $1 billion funding round in June 2014, Amazon said it planned to pour $2 billion into its own Indian operations.
On Amazon's earnings call, CFO Brian Olsavsky hinted that that investment continues to grow.
When one analyst asked about India, he said the company was "super excited" about opportunities in the region.
"When we see a positive surprise we double-down on it - that's kind of our policy - and India is that kind of surprise," Olsavsky said. "We're very happy, very encouraged early on about what we've seen so far with the ramping up of the business, the level of innovation going on for both customers and sellers."
REUTERS/Abhishek N. Chinnappa
Right now, India has the third greatest number of internet users in the world, after China and the United States, and is similarly ranked in smartphone penetration. Researchers expect the online shopping market in India to reach $15 billion by 2016 up from only $35 million in 2014.
Amazon sees India has a much more accessible market than China, a source told Re/code's Jason Del Rey earlier this year. That mindset makes sense because Amazon struggled to become a big player in China, seeing declining marketshare since 2008, in part because Alibaba is such a local favorite. Amazon even opened up its own store on Alibaba's site Tmall earlier this year.
Another investor threw some subtle-shade at Amazon's growth in China, asking whether Amazon expected a similar trajectory in India.
"I would say that India and China are totally different," investor relations investor Phil Hardin replied. "I think as Brian mentioned, India is a country that we're doubling-down on based on the success we've seen so far. And we're excited to be investing and have the opportunities we do at this point."
Overall, Amazon only saw tepid 3% international sales growth this quarter, though the company said that would have been 12% if it weren't for the unfavorable foreign exchange impact. Still, even 12% is down from 14% quarterly growth in Q2 2014, and 20% in 2013 (those figures also exclude the effect of exchange rates).
By double-down on its India operations, Amazon is clearly trying to make that region a more significant driver of growth. And not just on the ecommerce side: Amazon said it planned to bring its AWS cloud service to India in the future as well.
CEO Jeff Bezos recruited a particularly trusted executive, Amit Agarwal, to lead Amazon's India efforts. Agarwal has worked at Amazon for more than 16 years, including two years in the coveted position of Bezos' "shadow."
In India, he faces a set of challenges unique to the country. For example, it's incredibly mobile-first - the director of Google India predicts that by 2017, 70%-80% online transactions will happen via smartphone. Plus, The AP reported in August 2014 that fewer than 12% of Indians had credit or debit cards, so Amazon has had to adapt to a "Cash on Delivery" model, which isn't yet available in all areas.
"Everything is nascent in India-the seller ecosystem, the logistics, the payments," Agarwal told Saritha Rai for Forbes in January. "We have to connect the dots on a massive scale that involves hundreds of cities, thousands of sellers and millions of products."
But it's worth it:
"Is it big? Check. Can we add significant customer value? Check. Can we generate significant cash flow? Check," he added. "India ticks all the boxes for Amazon."
Disclosure: Jeff Bezos is an investor in Business Insider through hispersonal investment company Bezos Expeditions.